Round-off bias in earnings-per-share calculations

Abstract: Using data available on Standard & Poor's Compusat Data Files, a study sought to extend aspects of Thomas' (1989) work concerning unusual patterns in reported earnings-per-share (EPS) statistics to determine whether managers of public companies tend to bias the round-off of EPS calculations. The results of the study provide overwhelming evidence that managers of public corporations are more likely to round-up, rather than round-down, the last decimal presented in an EPS calculation. The incidence of EPS round-ups is positively associated with the value of the round-up to the manager. The incidence of EPS round-ups was found to be positively associated with price-earnings ratios and negatively associated with absolute levels of EPS. Various factors may affect the likelihood that a manager may round-off an EPS calculation in a biased fashion, but a factor that formed the basis of some of the study's tests is the perceived benefit that may accrue to the manager from biasing the EPS round-off.